Oil bankruptcies are just beginning. Here’s who could be next

Oil bankruptcies are just beginning. Here's who could be next
the petroleum industry downturn laid bare how easy America’s rise to superpower status in the energy world was made possible. Virtually unlimited borrowing has allowed shale companies to significantly expand production, whether or not this oil is needed.
Lockdown of junk bond market will tip the scales the weakest players in bankruptcy, risking countless American jobs along the way. This is what happened during the last oil accident which started in 2015.

The impending oil plate bankruptcies underscore the fragility of the boom-to-bust industry even before the coronavirus crisis.

“These companies were in trouble before COVID-19 happened,” John Kempf, senior director of Fitch Ratings, told CNN Business. “After 2015 and 2016, they never really rebuilt their balance sheets. When the stress came, they were not prepared for it.”

Despite a recent reboundOil prices in the United States have imploded three-quarters since early January, reaching just $ 15 a barrel. The crash was caused by oversupply, particularly from Russia and Saudi Arabia, and an unprecedented collapse in demand due to the coronavirus pandemic.

There is so much crude that the world lacks space to store everything. This conundrum brought crude oil far below zero last week, marking the first case of negative oil prices since the launch of futures in 1983.

$ 43 billion in default of junk energy bonds

Prices are so low that Rystad Energy has warned that hundreds of U.S. oil exploration and production companies could file for bankruptcy by the end of 2021.

The bankruptcy wave has already started. Earlier this month Whiting Petroleum ((WLL) filed for bankruptcy, marking the first Chapter 11 filing of the current crisis. Offshore diamond drilling ((TO DO) joined the bankruptcy club on Sunday. Diamond, which provides offshore drilling platforms for Hess ((HE IS), Western ((OXY) and BP ((BP), posted losses several months before the crisis.

Fitch Ratings warns that more than $ 43 billion in high-yield bonds and leveraged loans in the energy sector will default in 2020. For the context, that is almost five times the average level of sector default in the past twelve years.

Moody’s Investors Service has revised its short-term oil price assumptions down this week, predicting that US oil prices will now average $ 30 per barrel in 2020, too low for almost anyone which American oil shale company can make a profit. Moody’s sees American crude climb to just $ 40 in 2021.

“Financial risk is increasing and is expected to remain very high for all but the highest rated oil and gas issuers,” writes Moody’s in the report.

Chesapeake Energy in danger

The energy sector dominates Fitch’s list of most troubling debts, accounting for 60% of the list.

Fitch warned that several of these companies “may be in the process of imminent default”, including Chesapeake Energy ((CHK), the shale pioneer who recently moved from focusing on natural gas to target oil.
Reuters reported On Wednesday, Chesapeake is preparing a potential bankruptcy file and has held discussions with creditors on a possible loan to continue operations while sailing under Chapter 11 procedures. The company has not responded to a request of comments.
Chesapeake’s share price has dropped more than 80% this year. In order to keep its shares above the minimum of $ 1 required by the New York Stock Exchange, Chesapeake recently launched a Reverse stock split 1 for 200. The shale business also quarterly dividends suspended on preferred shares, noting that the movement “does not constitute a default” in the case of debt instruments.
California Resources ((CRC), another oil company reported by Fitch as a potential default, suffered a 76% drop in its shares this year. The energy company has cut spending to the bone, keeping just the bare minimum necessary for “mechanical integrity”.
In response to market speculation about its fate, California Resources released a declaration last month, saying it “is fighting hard to get the best results for our shareholders and other stakeholders”.
Fitch also cited a high default risk at Denbury Resources ((DNR), an oil and gas driller focused on the Gulf Coast and Rocky Mountain regions. Denbury’s title has fallen more than 70% this year. Last month, the company cut its investment budget by almost half.
Other companies that may soon default on their debt include Chaparral Energy ((TYPE), Colorado-based Jonah Energy, Bruin E&P Partners of Houston, and Vine Oil and Gas, said Fitch.

Skittish lenders

No one wants to lend to a shale oil company that cannot generate free cash flow at cheap prices. It is therefore difficult for the fracturers to roll over the existing debt before its maturity.

“There is no access to the financial markets to refinance. Lenders are reluctant to give money to this industry,” said Kempf, director of Fitch.

In addition, investors are tired since the energy sector has been struggling for years. The S&P 500 energy sector has been the worst performer – by far – in the past decade.

“The portfolio managers are tired of the volatility in oil and gas prices. They no longer want to be in the industry,” said Kempf.

Washington to the rescue?

A big joker is President Donald Trump promise to save the oil industry. Trump tweeted on April 21, one day after the crude had turned negative, that he instructed officials to “formulate a plan” to “make funds available” to oil and gas companies.

“We will never give up on the big American oil and gas industry,” said the president.

Treasury Secretary Steven Mnuchin said last weekend that the Trump administration was considering providing a “loan facility” to the energy sector.

“We are looking at many different options, and we have not come to any conclusions,” said Mnuchin. told Bloomberg News. No concrete details have been released on what this program might look like.

Analysts said oil companies with high-quality credit ratings will likely have access to these emergency funds.

“We can only make loans to creditworthy entities with the expectation that these loans will be repaid,” Federal Reserve Chairman Jerome Powell said on Thursday while speaking about the lending capabilities of the central bank.

But it is not clear whether the undesirable shale oil companies will have access to the funds they need to survive because of their precarious financial conditions.

“I don’t count on that to protect myself from defaults,” said Kempf of Fitch. “Many of these companies could not access the financial markets before COVID.”


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